Autocratic Union Organization and Foreign Direct Investment in the Mexican Automotive Parts Sector, 2004-2018

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Abstract: Due to its size and importance, the Mexican automobile industry was an important topic in negotiations for the USMCA agreement. A particularly contentious issue was the allegation that foreign direct investment (FDI) in Mexican parts plants has been facilitated by autocratic unions affiliated with the Confederation of Mexican Workers (CTM). Although this issue has been widely noted, there has been little systematic research on the topic. In this paper, we seek to fill this gap in the literature. Using panel data, we examine the determinants of FDI in the automotive parts sector in Mexico’s 31 states and Mexico City (formerly DF) from 2004 to 2018. The study makes four contributions to the literature. First, we demonstrate empirically that FDI in the sector concentrated in Mexican states with a higher lagged unionization rate. Second, controlling for the type of union organization, the study shows that FDI was positively associated with states where the CTM was already well-established in the automobile industry. Alternatively, FDI was negatively associated with states where independent and democratic unions had previously organized. Third, we clarify the conditions under which firms prefer pre-emptive unionization with the CTM to the alternative of union avoidance. Finally, the study points to the importance of education and transportation infrastructure in FDI decisions.